McCullough vs. Berger

Articles 336 and 342 of the Code of Commerce, which prescribe short periods for a buyer to claim defects in quantity or quality of merchandise received in bales or packages, do not apply to a sale where the goods are on the high seas at the time the contract is made in Manila and delivery in good condition at a foreign destination is expressly guaranteed as a condition precedent to the buyer's obligation to pay.

The plaintiff, E.C. McCullough & Co., was a business entity operating in Manila with a New York office; the defendant, S.M. Berger, was an experienced merchant who had shipped 501 bales of tobacco to New York consigned to S. Lowenthal & Sons. When Lowenthal & Sons dishonored the draft drawn against the shipment, the defendant sought a new buyer. The plaintiff and defendant had known each other for about ten years and had mutual confidence in each other. The transaction was governed by the Code of Commerce, which in Articles 336 and 342 prescribed short periods within which a purchaser must claim defects in merchandise received in bales or packages — four days for apparent defects and thirty days for inherent defects following delivery.

In February 1918, in Manila, the defendant S.M. Berger advised the plaintiff E.C. McCullough & Co. that he had shipped 501 bales of tobacco to New York consigned to S. Lowenthal & Sons, who had refused to honor the draft drawn upon them. The defendant asked the plaintiff whether he could use the tobacco provided it was "perfectly sound." At the plaintiff's request, the defendant signed a written guaranty confirming that he guaranteed the arrival of the tobacco in New York "in good condition," subject to conditions arising after its departure from Manila, which contingencies were covered by adequate insurance. Upon the strength of this guaranty, the plaintiff cabled his New York office to honor the defendant's draft, which was ninety days' sight for $33,109 — the same draft and amount previously refused by Lowenthal & Sons. The shipment consisted of 188 bales of "scrap" invoiced at 28 cents gold per pound and 313 bales of "striped" and "booked" at 36 cents gold per pound, sold c.i.f. New York. Before the tobacco's arrival, the plaintiff had found purchasers for a large portion of it, contracting to sell subject to examination as to condition.

The tobacco arrived in two shipments: 213 bales on April 26, 1918, and 288 bales on May 18, 1918. It was placed in warehouses by the plaintiff. Outwardly, with the exception of four or five bales, the tobacco appeared well baled and in good condition. However, upon physical inspection by the buyers to whom the plaintiff had contracted to sell it, the tobacco was found to be "musty" and was rejected. The plaintiff had sold 188 bales to a customer in Red Lion, Pennsylvania, and shipped 75 bales after arrival; that customer refused to receive any remaining bales, and the plaintiff was compelled to reship them back to New York. On May 21, 1918, the plaintiff paid the defendant's draft, completing his part of the contract.

On May 23, 1918, the plaintiff cabled the defendant that the tobacco was unsatisfactory, and on June 13, he cabled that there would likely be a loss. On June 28, the plaintiff wrote the defendant describing the musty condition of the tobacco, stating that it appeared the tobacco had been packed in that condition, and advising that he was doing everything possible to sell it, with no prospective buyer even at a loss of 25 per cent. By this time, the plaintiff had sold 66 bales of scattered samples and the 75 bales to the Red Lion customer, realizing $9,031.71. On August 9, the defendant acknowledged the letter and cables, stating he was not in a position to lose between seventeen and twenty thousand pesos, offering a reduction of four thousand pesos, or alternatively proposing that the bank pay back the amount of the draft with interest and take charge of the tobacco. The plaintiff did not receive this cable until August 21, when he cabled that he would turn the tobacco over to the defendant and awaited instructions, noting that at least twenty dealers had passed on the tobacco.

On September 5, 1918, the defendant wrote the New York Agency of the Philippine National Bank instructing it to pay the plaintiff $33,109 plus interest upon delivery of the 501 bales, stating that "on no account should they agree to accept any shortage in the number of bales." On October 18, without knowledge of these instructions, the plaintiff wrote the defendant accepting the proposition to take back the tobacco, noting he had not yet heard from the bank. On October 30, the bank wrote the plaintiff that it would take back the identical 501 bales and pay the draft amount with interest. The plaintiff then explained to the bank why the identical 501 bales could not be returned — he had realized $9,031.71 from 141 bales already sold — and offered to account for those proceeds and return the balance of unsold tobacco. The defendant replied that his instructions of September 5 would not be modified. The plaintiff then sold the remainder of the tobacco at public auction, sustaining a net loss of $11,867.98 over and above all charges and expenses. The trial court found, and the evidence confirmed, that the tobacco was not in good condition when it arrived in New York and was not in good condition when it left Manila, and that the plaintiff acted in good faith throughout.

• Applicability of Code of Commerce: Whether Articles 336 and 342 of the Code of Commerce, prescribing periods within which a purchaser must claim defects in merchandise, bar the plaintiff's claim for breach of warranty.
• Rescission vs. Affirmance: Whether the plaintiff, having allegedly agreed to rescind the contract and notified the defendant of such election, could thereafter refuse rescission and affirm the contract to recover damages for breach of warranty.
• Condition of the Tobacco: Whether the trial court erred in finding that the tobacco was not in good condition when it arrived in New York.
• Timeliness of Claim: Whether the plaintiff's claim for breach of warranty of quality was made within the statutory period.

• Applicability of Code of Commerce: No. Articles 336 and 342 do not apply to a sale where the goods are on the high seas when the contract is made in Manila and delivery in good condition at a foreign destination is expressly guaranteed as a condition precedent.
• Rescission vs. Affirmance: No valid rescission occurred. The defendant's offer to take back the tobacco was conditioned on the return of all 501 bales — an impossible condition since 141 had already been sold in good faith — and was not made in good faith.
• Condition of the Tobacco: No. The trial court's finding that the tobacco was not in good condition upon arrival in New York was sustained by conclusive evidence, and the tobacco was not in good condition when it left Manila.
• Timeliness of Claim: Yes, the claim was timely. The plaintiff cabled the defendant ten days after the tobacco's arrival that it was unsatisfactory, and again twenty-six days after arrival that there would be a loss, which was prompt given that the defects were inherent and could not be ascertained without opening the bales.

• Applicability of Code of Commerce: The Code of Commerce provisions governing claims for defects in merchandise received in bales or packages were not intended to apply to the facts of this case. Although the contract was made in Manila, the tobacco was on the high seas at the time, and under the contract it was to be delivered "in good condition" in New York. The transaction was not complete until the arrival of the tobacco in New York in good condition and the payment of the draft. The delivery of the tobacco at New York was a condition precedent devolving upon the defendant, without which he would have no cause of action against the plaintiff. The word "sold" in the written contract did not necessarily make the contract executed; the transaction showed the sale was not complete until arrival. Contracts of this nature should be construed with reference to the surrounding conditions and the relative situation of the parties. The defendant knew the plaintiff bought for resale, and the plaintiff, relying on the guaranty, found purchasers before the tobacco arrived. Accordingly, the prescriptive periods in Articles 336 and 342, which assume a completed sale with delivery within the jurisdiction, did not govern.

• Rescission vs. Affirmance: The defendant's offer to take back the tobacco and refund the purchase price was not actually made to the plaintiff until October 1918, approximately five months after the tobacco arrived, and was conditioned on the return of the full 501 bales. This was an impossible condition because the plaintiff had already sold 141 bales in good faith, realizing $9,031.71 — more than the actual agreed purchase price of those bales. The plaintiff offered to account for the proceeds of the sold bales and to return all unsold tobacco, but the defendant refused, insisting his instructions would not be modified. The defendant's refusal to accept this offer was strong evidence that he was seeking an undue advantage and that his offer was not made in good faith. The contention that there was a rescission or an accepted offer of rescission was untenable.

• Condition of the Tobacco: The trial court found, and the testimony was conclusive, that the tobacco did not arrive in New York "in good condition" and was not in good condition when it left Manila. The plaintiff's June 28 letter described the musty smell and ground smell of the tobacco, stating it appeared the tobacco had been packed in that condition. All material findings of fact by the trial court were sustained by the evidence.

• Timeliness of Claim: The defects in the tobacco were inherent and could not be ascertained without opening the bales and making a physical examination. When this was done, the plaintiff promptly cabled the defendant. The first cable was sent ten days after the arrival of the tobacco, advising it was unsatisfactory; the second, twenty-six days after arrival, advised of a likely loss, followed by the detailed letter of June 28. Even assuming Article 342 applied, the claim was made within thirty days after complete delivery was effected. The plaintiff could not be expected to take final action until the last shipment arrived on May 18. In the nature of things, the plaintiff could not immediately render a statement of the amount of his claim, as the extent of the loss depended on efforts to sell the tobacco.

• Executory vs. Executed Sale — A sale is executory, not executed, where the seller promises to transfer property at a future day or the agreement contemplates the performance of some act or condition necessary to complete the transfer. Until the act is performed or the condition fulfilled, no title passes to the buyer. A mere recital that the article is "sold" does not necessarily make the contract executed; the real intention of the parties, construed with reference to surrounding conditions, controls. In this case, although the word "sold" was used, the sale was executory because delivery of the tobacco in good condition in New York was a condition precedent.

• Condition Precedent of Delivery at Destination — Where a contract for the sale of goods requires delivery at a specified destination, the arrival of the goods at that destination in the agreed condition is a condition precedent that must be shown before either party can bring suit. The seller cannot recover the purchase price if the goods do not arrive at the destination in the condition guaranteed.

• Inapplicability of Code of Commerce Prescriptive Periods to Destination Contracts — Articles 336 and 342 of the Code of Commerce, which prescribe four-day and thirty-day periods for claiming defects in merchandise received in bales or packages, do not apply to sales where the goods are in transit on the high seas at the time the contract is made and delivery at a foreign destination in good condition is expressly guaranteed. These provisions assume a completed sale with delivery within the jurisdiction.

• Good Faith in Mitigation of Loss — A buyer who discovers defects in goods purchased for resale must act in good faith to minimize the loss, including making reasonable efforts to sell the goods and promptly notifying the seller. The buyer may sell portions of the goods and account to the seller for the proceeds, and the seller's refusal to accept such accounting and the return of unsold goods — while insisting on an impossible condition — constitutes evidence of bad faith.

• "Whatever may be the rule as to sales which are completed within the jurisdiction of the Philippine Islands, those sections do not, and were never intended to, apply to a case founded upon the facts shown in the record." — This passage articulates the ratio decidendi that the Code of Commerce prescriptive provisions do not govern destination contracts where goods are in transit at the time of contracting.

• "Although the word 'sold' is used in the written contract, the transaction shows that the sale was not complete until the arrival of the goods in New York." — This establishes the doctrine that the label used in a contract is not conclusive of whether the sale is executed or executory; the parties' intention and surrounding circumstances control.

• "The fact that the defendant did not accept this offer is strong evidence that he was seeking an undue advantage, and that his offer to plaintiff was not made in good faith." — This passage supports the holding that the defendant's conditional offer to take back the tobacco, conditioned on an impossible return of all 501 bales, did not constitute a valid rescission and evidenced bad faith.

• Middleton vs. Ballingall, 1 Cal. 446 — Cited as somewhat in point for the proposition that where a contract requires delivery of goods upon arrival at a destination, such arrival is a condition precedent that must be shown before either party can bring suit.

• Cyc., vol. 35, pp. 274, 275 and 276 — Cited as a treatise authority for the distinction between executed and executory contracts of sale, and for the rule that a mere recital that goods are "sold" does not necessarily make the contract executed, while a recital that the seller "agrees to sell" is not conclusive that title was not intended to pass immediately.

• Article 336, Code of Commerce — Provides that a purchaser who, at the time of receiving merchandise, fully examines it, loses the right to claim against the vendor for defects in quantity or quality; and that a purchaser has a right of action against a vendor for defects in quantity or quality of merchandise received in bales or packages, provided the action is brought within four days following receipt, and the damage is not due to accident, natural defect, or fraud. The Court held this provision did not apply to the facts of the case because the sale was executory until delivery in New York.

• Article 342, Code of Commerce — Provides that a purchaser who has not made any claim based on inherent defects in the article sold within thirty days following delivery loses all rights of action against the vendor. The Court held this provision did not apply because the transaction was not complete until arrival in New York, and even if it did apply, the plaintiff's claim was made within thirty days after complete delivery.

Araullo, C.J., Johnson, Malcolm, Avanceña, Villamor, Ostrand, and Romualdez, JJ., concurred.

• Street, J. — Concurred in the conclusion and in most of the opinion, but disagreed that the sale was not complete until the arrival of the tobacco in New York. In his view, the express guaranty that the tobacco would arrive in good condition, coupled with proof that it did not, gave the plaintiff an independent right of action for indemnity — regardless of whether Article 342 applied. He noted that even assuming Article 342 applied, the claim was made within thirty days after complete delivery. He characterized the defendant's maneuvers regarding taking back the tobacco on impossible terms as a ruse to gain advantage in the impending legal controversy, and found the contention that there was a rescission or accepted offer of rescission untenable.